Israel May Use U.S. Loan Backing for Gaza War Costs

[Mrs. Sharon B. Hodge]

Israel May Use U.S. Loan Backing for Gaza War Costs
by David Rosenberg


Jan. 22 (Bloomberg) -- The Gaza conflict may push Israel to use U.S. loan guarantees to help cover expenses that may rise to as high as 6 billion shekels ($1.5 billion), a former Finance Ministry official said.

War-related defense spending and civilian aid will boost the budget deficit and increase borrowing, Yoram Gabai, chairman of the Pe’ilim fund-management unit of Bank Hapoalim and a former Finance Ministry official, said in an interview. Raising the money at home may impede central bank efforts to reducing borrowing costs and revive economic growth.

“The government must use the U.S. loan guarantees to raise money abroad, a step that needs U.S. approval, in order to prevent a problem in the domestic market,” Gabai said. In 2003, the U.S. awarded Israel as much as $9 billion in guarantees.

The increase in costs come as economic growth eases and tax collections may decline. The economy will stagnate next year, Morgan Stanley said in a Jan. 20 report, after expanding at an average rate of 5 percent during the past five years.

The Tel Aviv Stock Exchange’s benchmark index rose 5 percent during the conflict as investors anticipated that the war would have little affect on the economy. The index posted its biggest annual loss since 1983 last year as the global slowdown affected Israel. The shekel gained about 0.5 percent during the conflict.

Smuggling Tunnels

Israeli warplanes began pounding weapons smuggling tunnels and Hamas buildings in Gaza on Dec. 27, a campaign aimed at ending rocket fire on Israeli towns and cities. Israel called up thousands of reserve soldiers for the conflict and sent ground troops into Gaza a week later.

Palestinian militants fired more than 800 rockets and mortar shells into southern Israel during the fighting. More than 1,300 Palestinians were killed, Palestinian hospital officials said. Thirteen Israelis also died.

The conflict left about 4,100 Gaza homes in ruins and cost about $1.9 billion to the Palestinian economy, the Palestinian Central Bureau of Statistics said on its Web site.

The budget deficit may widen to as much as 6 percent of gross domestic product this year, up from about 2.1 percent in 2008, as tax revenue falls 5 percent, according to Vered Dar, chief economist at Psagot Investment House Ltd.

Domestic Market

If Israel raises $2 billion overseas it would still have to raise 71 billion shekels this year on the domestic market to cover the deficit and refinance debt coming due, Deutsche Bank AG said in a report released today. That would be equal to 9.5 percent of GDP and would compare with 48 billion shekels last year, it said.

The Finance Ministry said Jan. 19 it would cover the costs of salaries for workers who couldn’t report to their jobs during the fighting. It also said it would compensate businesses for damage including lost sales. The government has declined to provide an official estimate for the fighting’s cost.

The central bank has cut its benchmark rate 2.5 percentage points in the past three months to a record low of 1.75 percent.

Standard & Poor’s Ratings Services and Moody’s Investors Service retained their rating for Israeli sovereign debt in reports issued during the fighting. S&P reiterated its “A” rating and “stable” outlook on Jan. 20, citing the government’s “commitment to continued fiscal discipline.” Moody’s retained its “A1” rating in a Jan. 7 report.

The war had “minor” direct impact on the Israeli economy, trimming 0.1 percentage point off economic growth, Gabai said. The rockets that fell on Israel failed to shut down large numbers of Israeli businesses, according to the Israel Manufacturers Association trade group.

The 2006 Lebanon war cost Israel about 0.9 percentage point of growth, Gabai said. The economy bounced back from the monthlong conflict, recovering all the output by the end of the year that was lost as 4,000 Hezbollah rockets rained down on the country’s north.

To contact the reporter on this story: David Rosenberg in Jerusalem at [e-mail]